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Feds Allow CAISO to Raise Bid Cap to $400/MWh; Reject Interim Switch to 'Hard' Cap

January 23, 2006
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FERC will allow the California Independent System Operator (CAISO) to raise its current $250/MWh bid cap for real-time energy bids and adjustment bids to a $400/MWh bid cap, but the Commission rejected a proposal by the California grid operator to change the current "soft" nature of the cap to a "hard" cap during an interim period prior to implementation of a Market Redesign and Technology Upgrade (MRTU) and a resource adequacy mechanism [ER06-354, EL06-44].

Meanwhile, the Federal Energy Regulatory Commission (FERC) in its Jan. 13 order said that it was launching an investigation into the price cap in the Western Electricity Coordinating Council (WECC) outside the CAISO, as well as examination of the CAISO ancillary service capacity bid cap.

CAISO on Dec. 21 filed a tariff amendment (No. 73) proposing to change its current soft $250/MWh bid cap for real-time energy bids and adjustment bids to a hard $400/MWh bid cap, effective Jan. 1, 2006 or as soon thereafter as possible.

Among other things, CAISO said that its proposal to change its bid cap from soft to hard was consistent with the Commission's directive that it change its bid cap to a hard cap when it implements the MRTU. CAISO did not propose to change the bid cap for ancillary services markets from the current soft $250/MWh cap.

The California-based Independent Energy Producers Association (IEP) responded to CAISO's filing by voicing concerns over the idea of CAISO's switching to a hard cap. IEP said that "it only makes sense that the $400/MWh bid cap also be a 'soft' bid cap. Simply put, the risk of a shortfall in the supply of electricity to California caused by generation unit-level variable costs exceeding the bid cap level based on the high and volatile price of natural gas justifies making the new cap a 'soft' cap."

In last week's order, FERC noted that the current $250/MWh soft bid cap in CAISO's energy market was established in October 2002 when natural gas prices were between $3 and $4/MMBtu.

"As the CAISO noted in its filing, in recent months, concerns over tight natural gas supplies have resulted in high and volatile natural gas prices throughout the country," FERC said. "Natural gas spot prices in California recently reached as high as $14/MMBtu."

Since natural gas is the fuel source "for a significant portion of generation used to meet California load, this price rise and volatility led the CAISO to have concerns that the current level of the bid cap may constrain the CAISO's ability to acquire sufficient power in real time. Given the current market design, which includes a must-offer obligation and a $250/MWh cap on energy, the Commission is concerned that generators may not have the opportunity to adequately recover their costs."

FERC noted that "no intervenor has opposed the increase, and find that raising the bid cap is justified by the well-documented rise in gas prices. Accordingly, the Commission accepts the CAISO's proposal to raise the current bid cap from $250/MWh to $400/MWh."

At the same time, FERC rejected CAISO's proposal to change the current soft nature of the cap to a hard cap during the interim period prior to the implementation of MRTU and a resource adequacy mechanism. FERC said that CAISO has not adequately supported such a change.

"A 'hard' cap, in combination with the CAISO's current must-offer obligation, could result in confiscatory rates because it would raise the possibility that sellers could be forced to operate at a loss," FERC said. "Based on the current circumstances of rising and volatile gas prices, we will retain the cap as a 'soft' cap during this interim period. The CAISO has filed an emergency request in response to an unusual situation of rapidly rising natural gas prices, and the Commission believes the importance of ensuring a market design that is both reliable and non-confiscatory outweighs the CAISO's desire to transition towards a 'hard' cap directed by the Commission to begin at the implementation of MRTU in 2007."

Meanwhile, FERC's preliminary judgment is that the maximum price for spot market sales in the WECC outside CAISO, as established by the Commission in a July 2002 order, should also be raised to a $400/MWh soft cap.

FERC proposed to increase the cap to a $400/MWh soft cap for all spot market sales in the WECC outside the CAISO, defined in a June 19, 2001 order as sales in the WECC that are 24 hours or less and are entered into the day of or day prior to delivery.

FERC instituted, under section 206 of the Federal Power Act (FPA), an investigation into the price cap on spot market sales in the WECC outside the CAISO.

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